Articles of association and shareholders’ agreement – Does my company need both?


Although a company’s articles of association and shareholders’ agreement are separate documents, it is important that they work together and do not contradict each other. The recent High Court decision in Lord and other v Maven Wealth Group Ltd et al. Is a timely reminder of the need for clear drafting of these documents.

The case concerned a dispute between shareholders over how the applicants’ holdings were to be valued following the exercise of the mandatory transfer provisions in the company’s articles of association.

The plaintiffs argued that the correct procedure for valuing the shares was set out in the Purchase Option and Shareholders Agreement (COSA), as this flowed directly from the definition of “fair value” in the articles of association. There were also provisions in the COSA that the documents should be read together, and that in the event of a conflict between the COSA and the articles, the terms of the COSA would prevail. On the other hand, the defendants asserted that the shares should be valued in accordance with the articles of association alone and that the reference to “fair value” in the COSA was intended only to identify the formula for determining the price, and not the mechanism of this. determination.

The High Court ruled that the defendants were correct and that the actions should be assessed in accordance with the Statutes. Although there is a dispute resolution provision in the COSA, the tribunal agreed that there was no real conflict between the provisions of the articles and the COSA, rather some “fairly trivial mess.”

The decision in Lord et al v Maven Wealth Group Ltd et al very focused on the facts of the case, but it nonetheless underlines the importance of the need to put in place a well-drafted shareholders’ agreement and to ensure that it operates in harmony with your company’s articles of association.

What are the statutes?

All limited companies are legally required to have a set of articles, which will need to be filed with Companies House. The articles of association are the main constitutive document of the company, governing matters such as the rights attached to the company’s shares, the holding of meetings and the making of decisions between directors and shareholders.

Other typical provisions found in a company’s articles of association include:

  • The terms of issue, sale and repurchase of shares;
  • Rights and responsibilities of directors;
  • Declaration and payment of dividends;
  • Walk around and slide along the rights.

Although articles are a required document, you still have some flexibility to run your business as you see fit. There are different forms of articles that your business can adopt, and although they must comply with the provisions of the Companies Act 2006, there are many provisions that can be changed to meet the needs of your business.

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between the shareholders of the company setting out their respective rights and responsibilities in the larger context of the operation of the company. Unlike the articles of association, it is not a legal requirement for a limited company to have one, but it is a good idea to have one in place as it aims to ensure that individual shareholders are treated fairly in the event of dispute.

Typical provisions found in the shareholders’ agreement include:

  • Protect minority and majority shareholders;
  • Dispute settlement mechanisms;
  • The time that each party must spend working for the company;
  • The extent to which shareholders may have interests other than the company;
  • A list of decisions that directors can take without reference to shareholders (some of which may relate to expenses, for example);
  • A list of decisions that must be returned to shareholders;
  • What happens if a shareholder decides to sell their shares (which may include a right of first refusal to other shareholders)?
  • Situations in which a shareholder may be forced to sell his shares; and
  • Restrictive clauses.

What are the differences?

The main difference between articles of association and shareholders’ agreement is that since articles of association are a statutory document that companies are required to keep and respect, they must be made available to the public at Companies House. In contrast, the shareholders’ agreement is a contract between the shareholders of the company, and is kept private.

In addition, as a contract, if one of the parties violates the Shareholders’ Agreement, the others can sue the party in breach for damages. This differs from a violation of the Statutes, which could render a decision void. This is an important distinction to make for shareholders who may not think that a claim for damages under a shareholders’ agreement will be as valuable as the potential remedy of having the action declared. incriminated null for violation of the statutes.

How can we help?

While it can be difficult to predict a time when shareholders will disagree, it is a good idea to have a shareholders’ agreement as it will govern what happens in the event of a dispute between the parties. We recommend implementing one at the same time as adopting new articles to ensure that documents work hand in hand, as this article illustrates, there can certainly be commonalities in the areas generals that they cover and there is therefore a risk that they will contradict each other. if we are not careful.

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